‘Premium’ flavour favours consumption demand

The post-COVID-19 pandemic period has seen a notable trend in the Indian consumer market. Wealthier individuals are spending more on luxury goods despite an overall economic slowdown. This trend applies to many sectors, including FMCG, cars, and housing.

A report by CRISIL (March 2023)1 found that demand for premium products has grown significantly across discretionary spending categories. For example, in the motorcycle market, sales of higher-end bikes (over Rs 90,000) have increased by 44% year-on-year in 9MFY23, compared to only 16% growth for entry-level bikes (under Rs 90,000). The report1 predicts that this trend will continue in FY24, with urban incomes and government employee salaries outpacing rural income growth in the coming year.

Image from Crisil report released for March 2023

Cut to FY24, this phenomenon of ‘premiumisation’ holds. Consumers are increasingly choosing to buy more expensive, high-quality products across various sectors. This is evident in the positive performance of companies selling liquor, paints, plastics, textiles, consumer staples, packaging, and jewellery, where premium products are outperforming their standard counterparts.

Goldman Sachs2 forecasts a bright future for India’s luxury market. Their report predicts a near doubling of the affluent class (earning over $10,000 annually) to 100 million within three years (2027). This growth is attributed to a strong economy, stable monetary policy, and easy access to credit, all of which have boosted consumer purchasing power and willingness to spend on luxury goods.

Image from a Goldman Sachs report dated 16th Feb, 2024

Where do we see ‘Premium’ play: Sectoral view

With many Indian consumers willing to pay for the ‘premium’ products, companies are capitalising on this trend.

Companies focusing on premium products within an industry are significantly outperforming their more mainstream competitors. For example, in the footwear industry, Metro Brands Ltd’s shoes, known for their premium offerings, are growing faster than Bata, a brand synonymous with affordability. Similarly, premium and luxury segments within companies are faring better compared to the other segments. The demand for SUVs, considered a luxury segment, is outpacing sales of entry-level cars. As a result, Mahindra and Mahindra, and Tata Motors, have done better in recent years than Maruti Suzuki, a trend we’ve been observing as early as October 2023 – refer to this link. This trend extends beyond product categories and into individual companies. United Breweries, for instance, witnessed impressive double-digit volume growth in their premium beer segment during Q3FY24. Further, companies exclusively addressing premium consumers’ needs are growing rapidly as well.

The image below shares a snapshot of some more companies that are being ‘premiumised’

Image from an article in Fortune India dated 8th Feb, 2024

These observations paint a promising picture for businesses targeting affluent Indian consumers, suggesting a sustained rise in this segment.

As such, despite the worry of a slowdown in consumption, the premium products or segments appear to be performing well. And as investors, that’s really where our focus should be. Let’s understand this trend with a few examples.

The FMCG sector is one of the key sectors that took a hit on account of the consumption slowdown, particularly in the rural markets. As such, in Q3FY243, the sector as a whole witnessed slower-than-usual growth. Sales and profits were sluggish, and major players faced stiff competition, especially from regional brands in rural markets. Rural demand remained weak despite the festive season due to factors like delayed winter, lower water reservoir levels, and high food inflation.

However, a bright spot emerged in urban markets, where consumers continued to favour premium products. This trend of volume growth alongside a focus on premiumisation is prevalent across the FMCG space. For instance, Hindustan Unilever (HUL)4 saw premium product sales grow 2.5 times than their mass product sales. Similarly, Marico Ltd.5 reported impressive double-digit growth in value terms for their premium personal care segment during Q3FY24.

But the consumer durables sector witnessed healthy growth in Q3FY243, with sales rising 8.3% and profits 12.9% year-on-year. Both business-to-business (B2B) and business-to-consumer (B2C) segments performed well, and this trend is expected to continue. Encouragingly, demand from smaller cities also improved. Price hikes were a key driver of profit growth, although increased advertising spending during the festive season slightly offset these gains.

Similar to FMCG, premium products played a significant role in the consumer durables sector. This is reflected in the performance of major companies like Crompton Greaves, Bajaj Electricals, and V-Guard Industries. Crompton Greaves, for instance, reported stronger sales in their premium segments, and V-Guard is actively expanding its premium offerings to improve margins. They are also looking to increase in-house manufacturing of these premium products for further profit gains.

Not just in food, beverages, and home appliances, even the fashion trends also went premium. For the retail sector, there was a strong demand for luxury goods. For instance, Aditya Birla Fashion and Retail (ABFRL)6 reported a loss in Q3, but their revenue grew year-over-year. Interestingly, their super-premium brands were the key performers, maintaining consistent growth. Recognising this trend, ABFRL plans to strategically increase focus on premiumisation within their Pantaloon segment as well. Among the textile3 7 companies too, this was visible, particularly in home furnishing. Customers prefer value products such as temperature-regulating sheets and custom-made rugs.

The auto sector3 is where the ‘premiumisation’ trend has been very prominent for the past few quarters. It reported a stellar performance in Q3FY24. Sales grew 13.4% year-on-year, and profit after tax (PAT) surged even higher (72.2% year-on-year). This can be attributed to several factors, including a decline in commodity prices, easing supply chain issues, and a stable currency. Within the passenger vehicle segment, SUVs remained the star performers.

The overall trend in the auto sector is clear: premiumisation is driving growth. Royal Enfield7 exemplifies this perfectly, with an average selling price much higher than its competitors. This success stems from their strong brand legacy and lifestyle appeal. Similarly, Bajaj Auto has partnered with Triumph7 to offer premium bikes, and Hero MotoCorp7 is manufacturing Harley Davidson bikes in India, indicating a strategic shift towards premiumisation in the two-wheeler segment as well. Looking ahead, the industry expects earnings growth to be driven by higher margins due to premiumisation, improved cost structures, and favourable input costs.

Another sector that has been consumers’ interest has been the real estate – house properties. The Indian real estate sector is showing mixed performance. Overall, a sample of major companies reported modest sales growth but a significant increase in net profit year-over-year. Experts9 believe the high-end segment is doing particularly well due to lower inventory, while affordable housing is seeing relatively slower growth.

So, it is evident that with a growing economy and rising incomes, more Indians are expected to enter the high net-worth category. Knight Frank’s ‘The Wealth Report 2024’8, predicts a 50% increase in the number of ultra-rich Indians by 2028. This favourable trend in these markets will fuel demand for premium products and services. However, long-term success hinges on more than just luxury goods.  For this strategy to be sustainable, there needs to be a broad-based economic recovery that lifts the standard of living for all.  It is yet to be seen if the rising tide, as they say, lifts all boats. 

Sources and references:  

1.https://www.crisil.com/content/dam/crisil/our-analysis/reports/corporate/documents/2023/03/rider-in-the-storm.pdf

2.https://www.goldmansachs.com/intelligence/pages/indias-affluent-population-is-likely-to-hit-100-million-by-2027.html

3.https://www.bankofbaroda.in/-/media/project/bob/countrywebsites/india/economic-scenario/thematic-reports/24-02/corporate-performance-q3fy24-21feb2024-22-14.pdf

4.https://www.hul.co.in/files/602f7563-74b2-4b90-b5f1-d57a1f03bece/dq-23-results-presentation.pdf

5.https://m.marico.com/investorspdf/Media_Release_-_Q3FY24.pdf

6.https://www.moneycontrol.com/news/business/earnings/aditya-birla-fashion-q3-firm-posts-net-loss-of-rs-108-crore-from-year-ago-profit-12265051.html

7.https://www.fortuneindia.com/long-reads/india-incs-premium-play/115694#:~:text=%22The%20latent%20desire%20for%20premium,fuelling%20demand%20for%20premium%20products.

8.https://content.knightfrank.com/resources/knightfrank.com/wealthreport/the-wealth-report-2024.pdf

9.https://www.livemint.com/money/personal-finance/real-estate-outlook-2024-is-affordable-housing-finance-ready-for-takeoff-11704170698497.html

https://www.sharekhan.com/MediaGalary/newsletter/Specialreport.pdf

https://economictimes.indiatimes.com/news/economy/indicators/the-great-indian-demand-divide-the-rich-set-the-cash-registers-ringing/articleshow/99554406.cms?from=mdr

https://timesofindia.indiatimes.com/business/india-business/affluent-india-the-emergence-of-a-wealthier-consumer-base/articleshow/106819112.cms 

https://www.fortuneindia.com/long-reads/india-incs-premium-play/115694#:~:text=%22The%20latent%20desire%20for%20premium,fuelling%20demand%20for%20premium%20products.

https://www.business-standard.com/india-news/india-to-see-highest-rise-in-number-of-ultra-rich-in-5-years-knight-frank-124022800543_1.html

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